SOCIETE INTERNATIONAL DE, MUMBAI V. DDIT (IT) 2(1), MUMBAI

CO 159/MUM/2010

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 8043 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 24 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 14-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 11-09-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 20-08-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S E DASTUR
• Keywords: Source of fund
• Section: 143(3); 32; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R S SYAL, AM & SHRI VIJAY PAL RAO, JM ITA NO. 572/MUM/2010 (ASST YEAR 2006-07) & CROSS OBJECTION NO.159/MUM/2010 THE ASST DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(1), MUMBAI VS SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAUTIQUES SC(SITA) AFL HOUSE.GR FLOOR LOK BHARTI COMPLEX, MAROL MAROSHI ROAD ANDHERI (E), MUMBAI (APPELLANT/RESPONDENT ) (RESPONDENT/CROSS OBJECTGO R) PAN NO. AACC0472A ASSESSEE BY SHRI S E DASTUR & MR NITESH JOSHI REVENUE BY SHRI MAHESH KUMAR DT.OF HEARING 5 TH NOV 2012 DT OF PRONOUNCEMENT 14 TH , NOV 2012 PER VIJAY PAL RAO, JM THIS APPEAL BY THE REVENUE AND THE CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 29.10.2009 OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE ASSESSMENT YEAR 2006-07. 2 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN T HIS APPEAL: 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID. CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSEE IS COV ERED BY THE PRINCIPLE OF MUTUALITY WITHOUT APPRECIATING THE FACT THAT: I) THE ASSESSEE WAS HAVING TRANSACTIONS WITH THE NO N MEMBERS ALSO. II) IT FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCE REGA RDING THE EXPENSES AND THEREBY, FAILED TO SATISFY THE ASSESSING OFFICE R THAT THE REVENUE RECEIVED WERE MATCHED BY THE EXPENSES INCURRED. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE ID. CIT (A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTO RED. ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 2 WHEREAS THE ASSESSEE HAS RAISED THE FOLLOWING GROUN DS IN ITS CROSS OBJECTIONS: 1 THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE COMPANY RECOVERS ITS COSTS ONLY AND THAT REIMBURSEMENT OF COSTS CANNOT BE REGARDED AS TAXABLE INCOME, EVEN IF RECOVERED FROM NON-MEMBERS. 2 THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION O F THE ASSESSING OFFICER IN ESTIMATING THE PROFITS OF THE COMPANY AT 5% OF THE G ROSS AMOUNTS RECOVERED FROM NON-MEMBERS. THE LEARNED CIT(A) ERRED IN NOT ADDRESSING THE FOLLOW ING GROUNDS OF APPEAL PREFERRED BY THE COMPANY: 3 THE LEARNED ADIT ERRED IN HOLDING THAT THE PROVISION S OF SECTION 44C OF THE ACT APPLY TO THE APPELLANT COMPANY IN RESPECT OF CER TAIN EXPENSES INCURRED AT HEAD OFFICE LEVEL WHICH MAY NOT FALL WITHIN THE DEFINITION OF HEAD OFFICE EXPENDITURE AS DEFINED IN SECTION 44C OF THE ACT 4 THE LEARNED ADIT ALSO FAILED TO APPRECIATE THAT HE AD OFFICE DOES NOT ONLY APPORTION CERTAIN COSTS TO INDIA, BUT ALSO ALLOCATES THE MATCHING COST RECOVERIES, SO THAT IN THE EVENT OF ANY DISALLOWANCE OF HEAD OFFICE COST APPORTIONMENTS THEN THE MATCHING COST RECOVERIES SHOU LD ALSO BE EXCLUDED FROM THE TAXABLE INCOME OF THE BRANCH, APPLYING THE PRINCIPLE IN ARTICLE 7(L)(A) OF THE INDIA-BELGIUM TAX TREATY. 5 THE LEARNED ADIT ERRED IN OBSERVING THAT THE PROVISI ONS OF SECTION 40(A)(III) MAY APPLY TO THE APPELLANT COMPANY. 6 THE LEARNED ADIT ERRED IN HOLDING THAT THE APPELLAN T COMPANY WAS REQUIRED TO WITHHOLD TAX FROM THE INTEREST PAYMENTS MADE BY I T TO ITS MEMBERS AND NOT HAVING DONE SO, THE PAYMENTS ARE DISALLOWABLE UNDER SECTION 40(A)(I) OF THE ACT. LEARNED ADIT FAILED TO APPRECIATE THAT THE PAYME NTS WERE NOT LIABLE TO TAX IN INDIA AND ACCORDINGLY THE APPELLANT WAS NOT REQUIRED TO WITHHOLD ANY TAX AT SOURCE AND CONSEQUENTLY NO DISALLOWANCE COULD BE MADE UNDER SECTION 40(A)(I) OF THE ACT IN RESPECT OF SUCH INTER EST CHARGES. 7 THE LEARNED ADIT ERRED IN NOT APPRECIATING THAT T HE NET INCOME OF THE APPELLANT COMPANY IS NIL AS IT RECOVERS AT COST. ACC ORDINGLY THE APPELLANT COMPANY DID NOT HAVE ANY TAXABLE INCOME. 8 THE LEARNED ADIT ERRED IN NOT ALLOWING DEPRECIATIO N ALLOWANCE UNDER SECTION 32 OF THE ACT WHILE COMPUTING THE NET INCOM E OF THE APPELLANT COMPANY. 9 THE LEARNED ADIT ERRED IN NOT ALLOWING THE DEDU CTION UNDER SECTION 80-LA OF THE ACT IN COMPUTING THE TOTAL INCOME OF THE APP ELLANT COMPANY. INTEREST UNDER SECTION 234D OF THE ACT 10 THE LEARNED CIT(A) ERRED IN NOT DIRECTING THE LEA RNED ADIT TO DELETE THE INTEREST CHARGED OF RS. 5,75,035 UNDER SECTION 234D O F THE ACT. ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 3 3 WE HAVE HEARD THE LD DR AS WELL AS THE LD SR COUN SEL FOR THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE ISSUE INVOLVED IN THE REVENUES APPEAL AS WELL AS IN THE CROSS OBJECTION OF THE ASSESSEE ARE CONSIDERED AND DECIDED BY THE TRIBUNAL IN ASSES SEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97 VIDE ORDER DATED 26.9.2012 . 4 THE ONLY ISSUE RAISED BY THE REVENUE IS REGARDING THE PRINCIPLE OF MUTUALITY, WHICH HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 1996-97 AFTER A DETAILED DISCUSSION OF THE FAC TS AS WELL AS LAW AND THE DECISIONS OF THE HONBLE SUPREME COURT AS WELL AS THE HIGH CO URT IN PAA 3.4 TO 3.24 . THE CONCLUDING PART OF THE ORDER OF THE TRIBUNAL IN PAR A 3.11.20, 3.12 TO 3.24 ARE AS UNDER: 3.11.20. WE HAVE NOTICED IN AN EARLIER PARA OF TH IS ORDER THAT IN A CASE OF A NON-MUTUAL ORGANIZATION, A FEW TRANSACTIONS WITH TH E MEMBERS DO NOT CONVERT ITS NON-MUTUAL STATUS TO MUTUAL. IN THE LIKE MANNER, THE OTHERWISE STATUS OF MUTUALITY OF AN ORGANIZATION CANNOT BE DE STROYED BECAUSE OF A FEW TRANSACTION WITH THE NON-MEMBERS. WHAT EXTENT OF P ARTICIPATION BY NON- MEMBERS DESTROYS THE OTHERWISE MUTUAL STATUS OF AN ORGANIZATION OR WHAT EXTENT OF PARTICIPATION BY MEMBERS CHANGES THE OTHER WISE STATUS OF NON- MUTUALITY DEPENDS ON THE CONSIDERATION OF THE TOTALI TY OF FACTS AND CIRCUMSTANCES OF EACH CASE. 3.12. FOLLOWING PRINCIPLES OF MUTUALITY CAN BE DEDUCED FROM THE ABOVE DISCUSSION:- A. NO ONE CAN TRADE WITH HIMSELF AND HENCE THERE CAN BE NO PROFIT FROM SELF. B. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AND S UCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES OR FACILITIES ONLY TO I TS MEMBERS, THERE CAN INVARIABLY BE NO PROFIT MOTIVE. EVEN IF SOME PROFIT E NSUES TO THE ORGANIZATION FROM MEMBERS ON TRANSACTIONAL LEVEL, WH ILE PURSUING THE OBJECTS OF THE ASSOCIATION IN PROVIDING GOODS AND SE RVICES TO ITS MEMBERS, THERE CAN BE NO TAX ON SUCH PROFIT ON THE BASIS OF T HE PRINCIPLE OF MUTUALITY. THE REASON IS THAT THE CONTRIBUTORS TO THE PROFIT AND PARTICIPATORS IN SUCH PROFIT, ARE THE SAME PERSONS AS A CLASS. IF NO PROFIT FOLLOWS FROM THE TRANSACTIONS WITH THE MEMBERS, OBVIOUSLY, THERE CAN BE NO TAX EVEN DE HORS THE RULE OF MUTUALITY. C. IF, AN ORGANIZATION OF THE NATURE AS DISCUSSED IN PO INT NO. B ABOVE, APART FROM ENTERING INTO TRANSACTIONS WITH ITS MEMBERS IN F URTHERANCE OF ITS ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 4 OBJECTS, INVESTS ITS FUNDS OR MAKES DEPOSIT IN BANK, THE RETURN OR INTEREST ON SUCH INVESTMENT/DEPOSITS WILL NOT BE COVERED BY T HE CHARACTER OF MUTUALITY AND SUCH AN AMOUNT WILL BE LIABLE TO TAX. IT IS SO FOR THE REASON THAT THE PRINCIPLE OF MUTUALITY WILL LACK AS THE CO NTRIBUTORS OF SUCH INTEREST INCOME WILL NOT BE PARTICIPATING IN SUCH INCOME. H OWEVER, MUTUAL CHARACTER OF THE ORGANIZATION IN RESPECT OF TRANSACTI ONS WITH ITS MEMBERS WILL CONTINUE AND INCOME THERE FROM WILL ENJOY EXEMP TION. D. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AND S UCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES/FACILITIES ONLY TO PUBL IC AT LARGE, THAT IS, NON-MEMBERS, THERE MAY OR MAY NOT BE PROFIT MOTIVE. WHEN THERE IS PROFIT MOTIVE AND PROFITS ACTUALLY FOLLOWS, SUCH PRO FIT IS LIABLE TO TAX. IF THERE IS NO PROFIT MOTIVE BUT STILL PROFIT FOLLOWS, SUCH A PROFIT IS ALSO CHARGEABLE TO TAX. IF, HOWEVER THERE IS NO PROFIT MOTIVE AND NO PRO FIT RESULTS, THERE WILL NOT BE ANY TAX BECAUSE OF NO INCOME AND NOT BECAUSE OF PRINCIPLE OF MUTUALITY. OBVIOUSLY IN SUCH A CASE, THE CONTRIBUTO RS TO THE PROFIT, BEING THE CUSTOMERS AS A CLASS, WILL BE DIFFERENT FROM THE PARTICIPATORS IN THE PROFIT, BEING THE MEMBERS OF THE ASSOCIATION AS A C LASS, THEREBY BREACHING THE PRINCIPLE OF MUTUALITY. E. IF, IN A CASE OF ASSOCIATION OF THE NATURE AS DISCU SSED IN POINT NO. D. ABOVE, THERE ARE BY AND LARGE TRANSACTIONS WITH NON-MEMBERS, BUT THERE ARE ONLY A FEW TRANSACTIONS WITH MEMBERS AS WELL, THE NATURE O F THE ORGANIZATION AS NON-MUTUAL, WILL REMAIN AS SUCH. WHEREAS PROFITS FROM TRANSACTIONS WITH NON-MEMBERS WILL BE LIABLE TO TAX, PROFIT FROM TRANSA CTIONS WITH THE MEMBERS WILL CONTINUE TO ENJOY EXEMPTION. F. WHEN THE ORGANIZATION PROVIDES FACILITIES AND SERVICE S BOTH TO ITS MEMBERS AND NON-MEMBERS, THE FOLLOWING CONSEQUENCES FLOW:- (I) IF THE `OBJECT OF SUCH AN ORGANIZATION IS `TO E ARN PROFIT, THERE IN NO MUTUALITY IN RESPECT OF TRANSACTIONS WITH MEMBERS . (II) WHEN THE `OBJECT OF THE ORGANIZATION IS `NOT T O EARN PROFIT BUT PROFIT EMERGES FROM TRANSACTIONS WITH MEMBERS AND NO N-MEMBERS, THE RULE OF MUTUALITY WILL NOT APPLY TO THE EXTENT OF TR ANSACTIONS WITH MEMBERS UNLESS TRANSACTIONS WITH MEMBERS ARE PHENOME NALLY MINIMAL. (III) IN BOTH THE ABOVE CASES COVERED UNDER (I) AND (II), PROFIT FROM TRANSACTIONS WITH NON-MEMBERS IS ALWAYS TAXABLE. 3.13. NOW WE WILL TEST THE FACTS OF THE INSTANT CASE ON THE TOUCHSTONE OF THE BROADER PRINCIPLES OF MUTUALITY AS FIGURED OUT BY US IN PRECEDING PARA. IT IS OBSERVED THAT THE ASSESSEE EXTENDED FACILITIES TO AI RPORT AUTHORITIES, UNITED NATION, IFC, UNESCO AND EQUANT CUSTOMERS. IT IS EV IDENT FROM PAGE 27 PARA 74 OF THE `STATEMENT OF FACTS FILED BY THE ASSESSE E BEFORE THE LEARNED CIT(A) THAT THE ASSESSEE-COMPANY AND EQUANT SHARED NETWORK O UTSIDE INDIA IN ORDER TO ACHIEVE ECONOMIES OF SCALE. UNDER THIS ARRANGEMEN T, THE COSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USAGE AND THESE CO STS RECHARGED WERE SHOWN IN ITS INCOME AND EXPENDITURE ACCOUNT. THE FA CT THAT THE ASSESSEE RENDERED SERVICES TO EQUANT CUSTOMERS IS ALSO BORNE O UT FROM ITS LETTER DATED 25.03.2004, A COPY OF WHICH IS PLACED ON PAGE 29 ON WARDS OF THE PAPER BOOK. FROM PARA (IVC), IT CAN BE NOTICED THAT : SI TA AND EQUANT SHARED ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 5 NETWORK RESOURCES IN CERTAIN COUNTRIES OUTSIDE INDIA, IN ORDER TO MAXIMIZE SUCH ECONOMIES OF SCALE. UNDER THOSE ARRANGEMENTS, THE C OSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USAGE. IT SHOWS THAT NON-MEMBERS DID AVAIL THE FACILITIES EXTENDED BY THE ASSESSEE. 3.14. NOW LET US SEE THE VOLUME OF TRANSACTIONS WITH SUCH NON-MEMBERS. THE ASSESSEES CONTENTION IS THAT IT WAS SIMPLY REC OVERING COSTS FROM ITS MEMBERS AND NON-MEMBERS FOR RENDERING SERVICES AND THE RE WAS NO PROFIT MOTIVE. THE TOTAL OF COST RECOVERIES FROM GOVERNMENT, INTERNATIONAL ORGANIZATIONS AND EQUANT CUSTOMERS, CONSTITUTING NO N-MEMBERS AS A GROUP, IS 0.07% OF THE TOTAL COST RECOVERIES. IT SHOWS THAT T HE ASSESSEE PROVIDED SERVICES TO ITS MEMBERS AT 99.93% OF ITS TOTAL OPERATIONS. THIS FACT EVIDENCES THAT NON- MEMBERS AVAILED THE FACILITIES PROVIDED BY THE ASSES SEE TO A VERY LIMITED EXTENT, LESS THAN EVEN 0.1% OF TOTAL. 3.15. AT THIS MOMENT, WE WILL TRY TO ASCERTAIN IF THE ASSESSEE WAS SET UP WITH A PROFIT MOTIVE. WE HAVE PERUSED ARTICLES OF ASSOCIAT ION OF THE ASSESSEE, A COPY OF WHICH IS PLACED AT PAGE 116 ONWARDS OF THE P APER BOOK. OBJECTS OF THE ASSESSEE ARE CONTAINED IN ARTICLE 3. MAIN OBJECT OF THE ASSESSEE AS PER CLAUSE A) OF ARTICLE 3 IS :`TO FOSTER ALL COMMUNICAT ION AND INFORMATION PROCESSING, MATTERS DIRECTLY OR INDIRECTLY CONNECTED WITH THE TRANSMISSION AND PROCESSING OF ALL CATEGORIES OF INFORMATION REQUIRED IN THE OPERATION OF THE AIR TRANSPORT INDUSTRY AND TO STUDY THE PROBLEMS RELATING TO THEM WITH THE AIM OF PROMOTING IN AL COUNTRIES SAFE AND REGULAR AIR TRANSPOR T. OTHER OBJECTS OF THE ASSESSEE ARE ON THE SAME LINES. THERE IS NO REFERENC E TO ANY PROFIT MOTIVE IN SUCH OBJECTS. IT HAS BEEN CONSISTENTLY CLAIMED BY THE ASSESSEE THAT IT HAS NOT EARNED ANY PROFIT FROM ITS TRANSACTIONS AND THE CONSID ERATION SO RECEIVED REPRESENTS ONLY COST RECOVERIES. 3.16. THE ABOVE FACTS INDICATE THAT PRIMARILY, T HE ASSESSEE IS NOT SET UP WITH A `PROFIT MOTIVE. SECONDLY, THE NON-MEMBERS AVAILI NG THE FACILITIES EXTENDED BY THE ASSESSEE ARE VERY INSIGNIFICANT, NOT EVEN 1% OF THE TOTAL. 3.17. THESE FACTS ARE DEFINITE POINTER TOWARDS THE ASSESSEE BEING A MUTUAL ORGANIZATION. UNDER SUCH CIRCUMSTANCES WE ARE OF TH E CONSIDERED OPINION THAT THE PRINCIPLE OF MUTUALITY CANNOT BE DENIED IN ENTIRETY EVEN IN RESPECT OF TRANSACTIONS BY THE ASSESSEE WITH ITS MEMBERS. ACCO RDINGLY, THE VIEW TAKEN BY THE LEARNED CIT(A) CAN NOT BE FAULTED WITH INSOFA R AS IT ACCEPTS THE RULE OF MUTUALITY QUA THE TRANSACTIONS WITH MEMBERS AND DEN IES THE SAME QUA THE TRANSACTIONS WITH NON-MEMBERS. 3.18. THE NEXT ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IN SUPPORT OF HIS CONTENTION THAT THE MUTUALITY SHOULD BE REJECTED IN ENTIRETY WAS WITH REFERENCE TO ARTICLES 20 AND 50 OF THE ARTICLE S OF ASSOCIATION OF THE ASSESSEE. IT WAS SUBMITTED THAT SINCE THE RETIRING O R RESIGNING MEMBERS ARE NOT ENTITLED TO PARTICIPATE IN THE RESERVES TO SOME EXTENT , THE MUTUALITY WAS LOST. IT WAS ARGUED THAT THE CONTRIBUTOR TO AND PARTICIPATOR IN THE SURPLUS FUND SHOULD BE CONSIDERED ON THE LEVEL OF INDIVIDUAL PERSONS. FOR THIS PROPOSITION, HE RELIED ON THE JUDGMENT IN THE CASE OF WANKANER JAIN SOCIAL WELFARE SOCIETY (SUPRA). IN THIS CASE THE HONBLE MADRAS HIGH COURT CO NSIDERED THE FACTS IN WHICH THE OBJECT OF THE SOCIETY WAS TO CREATE AND C ULTIVATE THE HABIT OF ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 6 SAVING AND THRIFT AMONG THE MEMBERS OF THE SOCIETY TO HELP BY WAY OF LOAN OR OTHER ASSISTANCE TO MEMBERS IN CASE OF A BONA F IDE NEED. THE RULES AND REGULATIONS OF THE SOCIETY MADE IT COMPULSORY FOR EVERY MEMBER TO PARTICIPATE IN THE SCHEME OF DEPOSIT. THE ASSESSING OFFICER DENIED THE MUTUALITY ON THE GROUND THAT EVERY DEPOSITOR WAS NOT NECESSARILY BORROWER AND THEREFORE, THE INTEREST PAID BY THE BORROWERS AND D ISTRIBUTED AMONGST THE NON-BORROWER MEMBERS DENTED THE MUTUALITY. THE HONB LE MADRAS HIGH COURT UPHELD THIS PRINCIPLE BY HOLDING THAT SINCE THE INT EREST INCOME WAS AVAILABLE FOR BEING DISTRIBUTED AMONGST ALL THE MEMBERS INCLUDI NG THOSE WHO HAD NOT BORROWED MONEYS, THE IDENTITY BETWEEN THE CONTRIBUTOR S AND PARTICIPATORS WAS LOST AND HENCE THE PRINCIPLE OF MUTUALITY WAS NO T SATISFIED. 3.19. THE QUESTION WHICH, THEREFORE, ARISES FOR O UR CONSIDERATION IS WHETHER THE MUTUALITY IS LOST BY REASON OF A MEMBER RESIGNING OR RETIRING FROM THE SOCIETY AND NOT GETTING ANY SHARE IN THE RESERVES. IN OTHER WORDS, THE LARGER QUESTION IS WHETHER THE CONTRIBUTORS TO THE FUND AND PARTICIPATORS IN THE FUND SHOULD BE THE SAME PERSONS ON AN INDIVIDUAL LEVEL O R A CLASS LEVEL. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SIND CO-OP ERATIVE HOUSING SOCIETY (SUPRA) CONSIDERED THE QUESTION OF MUTUALITY ON THE TRANSFER FEES RECEIVED BY THE CO-OPERATIVE SOCIETY FROM ITS MEMBERS. IN THIS CA SE, THE HONBLE JURISDICTIONAL HIGH COURT RECOGNIZED `CLASS OF MEMBER S AS PARTICIPATORS AS WELL AS CONTRIBUTORS FOR MUTUALITY, INSTEAD OF THE ` INDIVIDUAL MEMBERS. IT HAS BEEN HELD IN THIS CASE THAT THE FACT THAT ONLY SOME MEMBERS FROM THOSE WHO CONTRIBUTED MAY PARTICIPATE IN THE SURPLUS, IS IRRELE VANT AS LONG AS THE CLASS IS SAME. 3.20. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF KUMBAKO NAM MUTUAL BENEFIT FUND LTD. (SUPRA) TO CONTEND THAT THE PRINCIPLE OF M UTUALITY FAILS IF THE PERSONS WHO CONTRIBUTE TO THE INCOME ARE NOT THE SAME PERSON S WHO PARTICIPATE IN THE SURPLUS OF THE ORGANIZATION. IN THIS CASE THE ASS ESSEE CARRIED ON A BANKING BUSINESS RESTRICTED TO ITS SHAREHOLDERS, THAT IS, THE SHAREHOLDERS WERE ENTITLED TO PARTICIPATE IN VARIOUS RECURRING DEPOSITS SCHEMES OF T HE ASSESSEE OR TO OBTAIN LOANS OF SECURITIES. THESE RECURRING DEPOSITS CONST ITUTED THE MAIN SOURCE OF FUNDS OF THE ASSESSEE FOR ADVANCING LOANS. OUT OF THE INTEREST REALIZED BY THE ASSESSEE ON THE LOANS, INTEREST ON RECURRING DEPOSIT WAS PAID AND THE BALANCE WAS DIVIDED AMONGST THE MEMBERS ACCORDING TO THEIR SH AREHOLDING. THE ITO DENIED THE PRINCIPLE OF MUTUALITY AND ASSESSED THE E NTIRE PROFIT TO TAX, WHICH VIEW HAS BEEN UPHELD BY THE HONBLE SUPREME COURT. 3.21. WE ARE UNABLE TO SEE AS TO HOW THIS JUDGM ENT ADVANCES THE CASE OF THE REVENUE. THE ASSESSEE IN THAT CASE RECEIVED RECU RRING DEPOSITS AND MADE ADVANCES TO CERTAIN MEMBERS. THE SURPLUS WAS DI STRIBUTED AMONGST MEMBERS ACCORDING TO THEIR SHAREHOLDING AFTER MAKING A PROVISION FOR RESERVES ETC. THE SHAREHOLDERS WHO WERE ENTITLED TO PARTICIPA TE IN THE SURPLUS NEED NOT HAVE EITHER TAKEN LOANS OR MADE RECURRING DEPOSITS. FROM THESE FACTS, IT IS PALPABLE THAT THE SHAREHOLDERS WERE DIFFERENT AS A CLA SS FROM THE PERSONS WHO AVAILED THE LOAN FACILITY AS A CLASS. IT WAS NOT NECESSARY FOR A SHAREHOLDER EITHER TO TAKE LOAN OR TO MAKE A RECURRING DEPOSIT. TH US THE CONTRIBUTORS TO THE FUNDS WERE DIFFERENT AS A GROUP FROM THE PARTICIPATORS , BEING, THE SHAREHOLDERS OF THE CLUB AS A GROUP. ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 7 3.22. IN VIEW OF THE FACT THAT ARTICLES 20 AND 5 0 DEBAR THE RETIRING OR RESIGNING MEMBERS FROM PARTICIPATING IN THE RESERVES AVA ILABLE, CANNOT BE CONSIDERED AS A FACTOR ECLIPSING THE PRINCIPLE OF MUT UALITY. IT IS SO FOR THE REASON THAT THE PERSONS WHO ARE ENTITLED TO SHARE AND PARTICIPATE IN THE RESERVES OF THE SOCIETY CONTINUE TO REMAIN THE SAME A S A GROUP OR CLASS OF PERSONS. THE MERE FACT THAT A PERSON AT THE TIME OF RESIGNATION OR RETIREMENT IS NOT ENTITLED TO SHARE IN THE RESERVES OF THE ORGANIZ ATION, WOULD NOT DAMAGE THE MUTUALITY SO LONG AS THE PERSONS WHO ARE ENTITLE D TO SHARE SUCH RESERVES CONTINUE TO BE THE MEMBERS AS A CLASS. 3.23. BE THAT AS IT MAY, IT IS OBSERVED THAT TH IS FACT HAS BEEN CONSIDERED BY THE TRIBUNAL WHILE DECIDING THE PRINCIPLE OF MUTUA LITY IN RELATION TO ASSESSMENT YEARS 1974-75 AND 1975-76. THE TRIBUNAL HAS ELABORAT ELY REPRODUCED AND DISCUSSED THESE TWO ARTICLES IN ITS ORDER AND THER EAFTER RECORDED A POSITIVE CONCLUSION GRANTING THE STATUS OF MUTUAL ORGANIZATION TO THE ASSESSEE. SAME IS TRUE IN RESPECT OF THE CREATION OF RESERVES AS WELL. THE LEARNED AR HAS POINTED OUT THAT THE RESERVES SO REFERRED TO BY THE L EARNED DEPARTMENTAL REPRESENTATIVE WERE CREATED MANY YEARS AGO IN ACCORDAN CE WITH THE BELGIAN STATUTORY REQUIREMENTS OR AROSE DUE TO REVALUA TION OR REFURBISHMENT COST OR DUE TO CAPITALIZATION OF REFURBISHMENT COST. THE QUESTION OF RESERVES HAS ALSO BEEN DISCUSSED IN THE ORDER FOR ASSESSMENT YEARS 1974-75 AND 1975- 76. IN VIEW OF THE CONCLUSION ARRIVED AT BY THE TRIB UNAL IN EARLIER YEARS HOLDING THAT THE MUTUALITY IS NOT DISTURBED BY REASON OF ARTI CLE 20 AND 50 OF THE ASSESSEE OR THE CREATION OF RESERVES, WE DO NOT DEEM IT NECESSARY TO DIVE DEEP INTO THE ARGUMENTS OF THE LD. DR WITH A VIEW TO BRING OUT ANY DECISION CONTRARY TO WHAT HAS ALREADY BEEN TAKEN BY THE TRIBUNA L IN EARLIER YEARS ON THE SAME FACTS AND CIRCUMSTANCES. 3.24. WE, THEREFORE, SUM UP OUR CONCLUSION ON GROUND NO.1 TAKEN BY THE REVENUE IN ITS APPEAL BY HOLDING THAT THE ASSESSEE IS COVERED BY THE PRINCIPLE OF MUTUALITY TO THE EXTENT OF ITS TRANSACTIONS WITH THE MEMBERS. INCOME FROM TRANSACTIONS WITH NON-MEMBERS IS OUTSIDE THE PURVIE W OF MUTUALITY. 4 FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL, WE HOLD THAT THE ASSESSEE IS COVERED BY THE PRINCIPLE OF MUTUALITY TO THE EXTENT OF ITS TRANSACTION WITH THE MEMBERS ONLY AND THE INCOME FROM THE TRANSACTION OF NON MEMBERS IS OUTSIDE THE PURVIEW OF THE MUTUALITY. 5 NOW, WE WILL TAKE UP THE CROSS OBJECTION OF THE A SSESSEE: 6 WE HAVE HEARD THE LD SR COUNSEL FOR THE ASSESSEE AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. IT IS F AIRLY ADMITTED BY BOTH THE PARTIES THAT THE ISSUE RAISED IN THE CROSS OBJECTION HAS A LSO BEEN CONSIDERED AND DECIDED ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 8 BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASS ESSMENT YEAR 1996-97. HOWEVER, THE LD SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE TRIBUNAL HAS MADE CERTAIN OBSERVATIONS/REMARKS IN PARA 5.5 OF THE ORDER FOR T HE ASSESSMENT YEAR 1996-97 AT PAGE 77 OF THE ORDER REGARDING THE CORRECTNESS OF THE INCOME DIVULGED FROM THE ACCOUNTS OF THE ASSESSEE. THE LD SR COUNSEL HAS SUB MITTED THAT IT MAY BE CASE OF NON VERIFIABILITY OF THE ITEMS; BUT IT CANNOT BE SAID T HAT THE ACCOUNTS OF THE ASSESSEE ARE NOT CORRECT. THUS, THE LD SR COUNSEL HAS SUBMITTED THAT THERE IS NO MATERIAL ON RECORD ON THE BASIS OF WHICH IT CAN BE CONCLUSIVELY SAID T HAT THE ACCOUNTS OF THE ASSESSEE DOES NOT REFLECT THE CORRECT INCOME AS HELD BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND ACCEPTED BY THE TRIBUNAL FOR THE A SSESSMENT YEAR 1996-97. HE HAS REFERRED THE NOTES OF ACCOUNTS IN THE AUDIT REPORT AND SUBMITTED THAT THE ACCOUNTS OF THE HEAD OFFICE ARE AUDITED BY SOME OTHER AUDITO RS AND THE AUDIT REPORT OF THE OTHER AUDITOR HAS BEEN RELIED UPON BY THE AUDITOR O F THE ASSESSEE. 6.1 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT THE ISSUE AS WELL AS THE FACTS ARE IDENTICAL IN THE ASSESSMENT YEAR UNDER CONSIDER ATION TO THOSE OF ASSESSMENT YEAR 1996-97 AND THEREFORE, THE TRIBUNAL, AFTER TAK ING NOTE OF THE FACT THAT IT WAS FOUND THAT BOTH SIDES OF THE ASSESSEES INCOME AND EXPENDITURE ARE MATCHING PAISA TO PAISA AND NO UNDER RECOVERY OR OVER RECOVERY SH OWN AS AN ASSET OR LIABILITY IN ITS BALANCE SHEET TURNED DOWN THE CONTENTION OF THE ASS ESSEE REGARDING THE ALLOCATION OF HO EXPENSES 7 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE R ELEVANT MATERIAL ON RECORD, WE FIND THAT THE FACTS REGARDING THE ISSUE RAISED B Y THE ASSESSEED IN THE CO ARE IDENTICAL. ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 9 7.1 THE ISSUE RAISED IN GROUND NO.1 AND 2 OF THE CO HAS BEEN DEALT BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 1996-97 IN PARAS 5 .4 & 5.5 AS UNDER: 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THERE CAN BE NO DISPUTE ABOUT THE FACT THA T ANY AMOUNT RECEIVED BY WAY OF REIMBURSEMENT, NOT CONTAINING ANY ELEMENT OF PROFIT, IS NOT LIABLE TO TAX. THIS PRINCIPLE HAS BEEN LAID DOWN BY THE HONB LE JURISDICTIONAL HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT [(2009) 177 TA XMAN 81 (BOM.)] AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHIND RA AND MAHINDRA LTD. V. DCIT [(2009) 313 ITR (AT) 263 (MUM) (SB)]. IN THESE CASES, IT HAS BEEN HELD THAT WHEN A PARTICULAR AMOUNT OF EXPENDITURE IS INCURRED AND THE SAME SUM IS REIMBURSED AS SUCH, THAT CANNOT BE CONSIDERED AS HAV ING ANY PART OF IT IN THE NATURE OF INCOME. THIS BRINGS US TO THE PRINCIPLE THA T IF THERE IS CERTAIN REIMBURSEMENT OF EXPENSES AS SUCH, WITHOUT THERE BEI NG ANY MARK UP INCLUDED IN SUCH REIMBURSEMENT, THERE CANNOT BE ANY Q UESTION OF EARNING ANY INCOME LIABLE TO TAX FROM SUCH REIMBURSEMENT. WE AGREE WITH THE LEARNED AR ON THIS PRINCIPLE THAT THE REIMBURSEMENT OF EXPENSES DOES NOT LEAD TO ANY INCOME AND IN SUCH A SITUATION THERE CA N BE NO QUESTION OF ANY INCOME EMBEDDED IN SUCH REIMBURSEMENT. 5.5. HOWEVER WE FIND THAT THIS PRINCIPLE IS NOT A PPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IT IS OBSERVED F ROM THE STATEMENTS OF SHRI S.GOPALAKRISHNAN AND MR.ANDREW CLEAK RECORDED AT THE T IME OF SURVEY THAT THE BASIS OF ALLOCATION OF COSTS TO DIFFERENT COUNTRI ES BY THE HO WAS NOT KNOWN. IT WAS ADMITTED THAT THE HO ALLOCATES A PROP ORTION OF ITS GENERAL ADMINISTRATIVE AND FINANCING COST TO OTHER BRANCHES TO EXACTLY MATCH THE TOTAL COST INCURRED IN EACH COUNTRY IN EACH MONTH. I T WAS ALSO ADMITTED THAT THERE WAS NO VERIFICATION OF THE EXPENSES ALLOCATED BY THE HO BECAUSE THE BASIS OF CHARGE WAS KNOWN TO HO ALONE AND THE DETAIL S OF SUCH COMPUTATION WERE NOT PROVIDED TO THE INDIAN BRANCH. ON A QUESTION ABOUT THE RECORDING OF REVENUES, IT WAS ADMITTED THAT THE ENTRY WAS PA SSED ON THE RECEIPT OF INTIMATION FROM HO AND HOW SUCH REVENUES ARE DETERMINE D, WAS NOT KNOWN. IN RESPONSE TO QUESTION NOS.12 AND 13, SHRI GOPALAKRI SHNAN ADMITTED THAT ACCOUNTS WERE FINALIZED BY THE HO AND AFTER FINALIZA TION OF SUCH ACCOUNTS, A SIGNED COPY OF THE BALANCE SHEET WAS SENT TO THE BRA NCH OFFICE IN INDIA. THE LEARNED AR HAS INVITED OUR ATTENTION TOWARDS ITS LETTE R DATED 5.02.2005 ADDRESSED TO THE LD. CIT(A) ABOUT THE BASIS OF ALLO CATION. FROM THIS LETTER IT IS CRYSTAL CLEAR THAT THE ASSESSEE STATED BEFORE THE LEARN ED CIT(A) THAT THE GLOBAL COST RECOVERIES MADE BY THE SITA HO ARE ALLOCAT ED TO ALL OF THE SITA BRANCHES WORLDWIDE SO AS TO MATCH THE COSTS BORNE BY THOSE BRANCHES. THUS, THE OVERALL EFFECT OF ALLOCATING HEAD OFFICE COSTS TO THE SITA BRANCHES WORLDWIDE IS TO INCREASE BOTH THE BRANCH COSTS AND A LSO THE CORRESPONDING COST RECOVERIES WHICH ARE ALLOCATED TO EACH BRANCH TO MATCH THOSE COSTS. FROM THIS LETTER IT IS ALSO OBSERVED THAT THE BASIS O F ALLOCATION OF COSTS AMONGST VARIOUS BRANCHES IS KNOWN ONLY AT THE HO LEVEL WITH N O INTIMATION TO THE INDIAN BRANCH ABOUT SUCH BASIS. AT THIS STAGE, WE WOULD LI KE TO HIGHLIGHT THAT INDIA IS CONCERNED ONLY WITH THE TAX REVENUES RELATING TO INDI AN OPERATIONS. UNLESS IT IS PROPERLY ESTABLISHED THAT ALL THE EXPENSES CLAIMED BY THE INDIAN BRANCH REPRESENTS THE ASSESSEES SHARE IN A PROPER MANNER, IT C ANNOT BE ACCEPTED ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 10 THAT THE ALLOCATION WAS MADE ON SOME RATIONAL BASIS. HERE IS A CASE IN WHICH BOTH THE SIDES OF THE ASSESSEES INCOME AND EXPENDI TURE ACCOUNT ARE TALLYING PAISA TO PAISA. THE LEARNED AR SUBMITTED THAT THE C OST AND REVENUES ARE MATCHED AND IF THERE IS ANY NET OVER-RECOVERY OR NET UNDER-RECOVERY, THE SAME IS CARRIED FORWARD AND AT THE END OF THE YEAR TH E AUDITED ACCOUNTS REFLECT CUMULATIVE UNDER-RECOVERY OR OVER-RECOVERY FOR THE YEAR. THIS SUBMISSION WAS MADE BY READING FROM THE ASSESSEES AF ORESAID LETTER DATED 05.02.2005 ADDRESSED TO THE CIT(A). ON A SPECIFIC QU ESTION AS TO WHAT IS THE AMOUNT OF UNDER-RECOVERY OR OVER-RECOVERY IN THE ACCO UNTS OF THE ASSESSEE FOR THIS YEAR OR ANY EARLIER OR LATER YEAR, THE LEARNED AR FAILED TO POINT OUT ANY SUCH AMOUNT. WE HAVE PERUSED THE INCOME AND EXPENDI TURE ACCOUNT AND BALANCE SHEET OF THE ASSESSEE. IT IS OBSERVED THAT BOTH THE SIDES OF THE ASSESSEES INCOME AND EXPENDITURE ARE MATCHING PAISA TO PAISA AND THERE IS NO UNDER-RECOVERY OR OVER-RECOVERY SHOWN AS AN ASSET OR A LIABILITY IN ITS BALANCE SHEET. FURTHER, WHEN WE CONSIDER THE FACT TH AT THE ACCOUNTS OF THE ASSESSEE WERE MAINTAINED AT THE HO LEVEL, THERE REMA INS NOTHING TO DOUBT THE CORRECTNESS VIEW TAKEN BY THE LEARNED CIT(A) TH AT THE ACCOUNTS OF THE ASSESSEE DO NOT DIVULGE THE CORRECT INCOME. NOT ONL Y THE BASIS OF ALLOCATION OF EXPENSES BUT ALSO THAT OF THE REVENUE, AS DONE BY THE HO IS NOT KNOWN TO THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, THE CONTEN TION THAT THE ASSESSEE WAS ONLY RECOVERING COSTS FROM ITS NON-MEMBERS AND THERE WAS NO PROFIT ELEMENT IN IT, IS NOT OPEN FOR VERIFICATION. 7.2 WHEN THE TRIBUNAL HAS DECIDED THIS ISSUE AFTER CONSIDERING THE RIVAL CONTENTION AND RELEVANT FACTS, THEN IN THE ABSENCE OF ANY NEW FACTS OR MATERIAL, WE DO NOT FIND ANY SUBSTANCE IN THE CONTENTION OF THE LD SR COUNSE L FOR THE ASSESSEE REGARDING THE REMARKS OF THE TRIBUNAL IN THE EARLIER YEAR. MOREO VER, THE SAME DOES NOT EFFECT THE FINDINGS OF THE TRIBUNAL ON THIS ISSUE. 7.3 AS REGARDS GROUND NO.2 TO 9 OF THE CO ARE CONCE RNED, THE TRIBUNAL HAS CONSIDERED THE SAME IN PARA 5.6 & 5.7 AS UNDER: 5.6. THE LEARNED AR ALSO PRESSED INTO SERVICE THE PR OVISIONS OF SECTION 44C TO CONTEND THAT WHERE THE BASIS OF ALLOCATION OF HO EXPENDITURE IS NOT KNOWN, DEDUCTION FOR SUCH HO EXPENSES HAS TO BE MADE IN TER MS OF SECTION 44C. IN THE LIGHT OF THIS SECTION, THE LEARNED AR CONTENDED THAT ONLY A SMALL PORTION OF THE HO EXPENSES OUGHT TO HAVE BEEN DISALLOWED BY TH E LD. CIT(A) INSTEAD OF COMPUTING INCOME AT 5% OF THE GROSS RECEIPTS. 5.7. WE ARE NOT CONVINCED WITH THIS CONTENTION F OR THE REASON THAT SECTION 44C ONLY TALKS OF HO EXPENSES, WHICH MEAN EXECUTIV E AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE OU TSIDE INDIA INCLUDING EXPENDITURE IN RESPECT OF RENT, RATES, REPAIRS ETC. IT IS ONLY THE ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES WHICH IS COVERED WITHIN THE PURVIEW OF ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 11 SECTION 44C. ON THE CONTRARY, WE ARE CONSIDERING A CAS E IN WHICH NOT ONLY THE BASIS OF ALLOCATION OF EXPENSES IS NOT KNOWN, BUT T HE BASIS OF ALLOCATION OF INCOME IS EQUALLY UNKNOWN AT INDIA LEVEL. THIS BRI NGS US TO A SITUATION WHERE NEITHER THE INCOME SIDE NOR THE EXPENDITURE SIDE OF TH E ASSESSEES INCOME AND EXPENDITURE ACCOUNT IS FULLY CAPABLE OF VERIFICAT ION. IT IS IN SUCH CIRCUMSTANCES THAT RULE 10 OF INCOME-TAX RULES, 196 2 COMES TO THE RESCUE OF THE REVENUE FOR DETERMINATION OF INCOME IN THE CASE OF NON-RESIDENTS. IT IS THIS VERY RULE WHICH HAS BEEN INVOKED BY THE ASSESSING OFF ICER AND ALSO APPLIED BY THE LEARNED CIT(A) IN ESTIMATING THE INCOME OF TH E ASSESSEE. IN OUR CONSIDERED OPINION THE LEARNED CIT(A) WAS MORE THAN J USTIFIED IN ESTIMATING THE INCOME AT 5% OF THE GROSS RECEIPTS FROM NON-MEMBER S. THESE GROUNDS TAKEN BY THE ASSESSEE ARE NOT ALLOWED. 8 FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL, WE FIND NO MERIT IN THE GROUND NO 1 TO 9 OF THE CO RAISED BY THE ASSESSEE; ACCORDINGLY, THE SAME ARE DISMISSED. 9 GROUND NO.10 IS REGARDING LEVY OF INTEREST U/S 23 4D. 10 WE HAVE HEARD THE LD AR AS WELL AS THE DR AND C ONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE FIND THAT TH IS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF CIT VS INDIAN OIL CORPORATION LTD IN INCOME TAX APPEAL NO . 2012 OF 2011 VIDE ORDER DATED 12 TH SEPT 2012. THE RELEVANT PART OF THE ORDER OF THE HONBLE HIGH COURT IN PARAS 25 TO 27 ARE AS UNDER: 25) THE AFORESAID DECISION WAS RENDERED PRIOR TO THE INTRODUCTION OF EXPLANATION-2 TO SECTION 234D OF THE ACT. THE KERALA HIGH COURT WHICH HAD NO OCCASION TO CONSIDER EXPLANATION 2 HELD THAT AS THE PROVISION OF INTEREST IS NOT INTRODUCED WITH REFERENCE TO ANY ASSESSMENT YEAR, IT MUST BE TAKEN TO APPLY ONLY WITH EFFECT FROM 1/06/2003. THIS SUBMISSION OF THE RESPONDENT-ASSESSEE WOULD REQUIRE LIMITING THE CLEAR WORDS OF A DECLARATORY AMENDMENT IN AN EXPLANATION 2 TO SECTION 234D OF THE ACT WHICH SPEC IFICALLY PROVIDES THAT IT SHALL ALSO APPLY TO AN ASSESSMENT YEAR COMMENCING BEFORE 1/06/20 03. THE ONLY QUALIFYING CRITERION IS THAT PROCEEDINGS IN RESPE CT OF SUCH ASSESSMENT IS COMPLETED AFTER 1/06/2003. ONCE THE EXPLANATION IS HELD TO BE RETROSPECTIVE IN RELATION TO THE ASSESSMENT YEARS COMMENCING BEFOR E 1/6/2003 IT WOULD NOT BE OPEN TO RESTRICT THE OPERATION OF SECTION 234D OF THE ACT ONLY WITH EFFECT FROM 1/6/2003. 26) A STATUTE COULD BE RETROSPECTIVE IN OPERATION BEI NG EXPRESSLY STATED OR BY NECESSARY IMPLICATION. THE CASE OF THE REVENUE IS THA T SECTION 234D AS INTRODUCED ON 1ST JUNE, 2003 WAS RETROSPECTIVE IN OP ERATION BY NECESSARY ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 12 IMPLICATION. HOWEVER, AS DOUBTS WERE RAISED ABOUT IT S RETROSPECTIVELY, THE SAME WAS CLARIFIED BY ADDING AN EXPLANATION TO SECT ION 234D BY FINANCE ACT, 2012. UNDER THE ACT WHAT IS BROUGHT TO TAX IS NOT TH E INCOME OF THE ASSESSEE IN THE ASSESSMENT YEAR BUT THE INCOME OF THE ASSESSEE IN THE PREVIOUS YEAR. THE LIABILITY TO TAX ARISES ON ACCOUNT OF THE FINANCE AC T WHICH FIXES THE RATE AT WHICH THE TAX IS TO BE PAID. THE LAW TO BE APPLIED IS AS EXISTING ON THE 1ST DAY OF APRIL OF THE PREVIOUS YEAR. IN SUPPORT THE COUNSEL FOR THE RESPONDENT RELIED UPON THE DECISION OF THE SUPREME COURT IN KARIMTHUR AVI TEA ESTATE LTD. V. STATE OF KERALA 60 ITR 262, MAHARAJAH OF PITHAPURM V. CIT 1 3 ITR 221 (PC) AND CIT V. SCINDIA STEAM NAVIGATION CO. LTD. 42 ITR 539. THE AFORESAID DECISI ONS ARE NOT RELEVANT FOR OUR PURPOSE PARTICULARLY, IN VIEW OF THE F ACT THAT EXPLANATION 2 TO SECTION 234D OF THE ACT AS INTRODUCED BY THE FINANCE ACT,2012 BEING DECLARATORY IN NATURE WOULD BE RETROSPECTIVE. THIS AME NDMENT MAKE IT CLEAT THAT IT SHALL APPLY ASSESSMENT YEARS EVEN PRIOR TO 1 /06/2003. 27) IN VIEW OF THE ABOVE, WE HOLD THAT THE DECISION OF THE TRIBUNAL IN ITO V. EKTA PROMOTERS PVT. LTD. REPORTED IN 113 LTD 719 WHIC H HAS BEEN FOLLOWED IN THE IMPUGNED ORDER BY THE TRIBUNAL IS NOT CORRECT. ONE MORE ASPECT OF THE MATTER WHICH MUST BE BORNE IN MIND IS THAT TILL SUCH TIME AS THE ASSESSMENT PROCEEDINGS ARE COMPLETED IN RESPECT OF ANY ASSESSMEN T YEAR, THE AMENDMENT MADE TO THE ACT WOULD BE APPLICABLE EVEN IN CASE OF PENDING PROCEEDINGS. IT IS NOT THE CASE OF THE RESPONDENT T HAT THE PROCEEDING IN REGARD TO REFUND WHICH HAS BEEN GRANTED UNDER SECTION- 143(1) OF THE ACT ARE CONCLUDED AND FINAL. THE REFUND WHICH HAS BEEN GRANTE D UNDER SECTION 143(1) OF THE ACT IS PROVISIONAL, TO BE FINALLY DETE RMINED WHEN FINAL ASSESSMENT ORDER IS PASSED UNDER SECTION 143(3) OF THE ACT. EXP LANATION-2 TO SECTION 234D OF THE ACT MAKES IT CLEAR THAT IT WOULD BE APPLICABL E TO PENDING PROCEEDINGS I. E. WHERE ASSESSMENTS IN RESPECT OF SUCH ASSESSMENT YEAR ARE NOT COMPLETED ON 1.6.2003. 11 FOLLOWING THE DECISION OF THE HONBLE JURISDICTI ONAL HIGH COURT IN THE CASE OF INDIAN OIL CORPORATION (SUPRA), WE DECIDE THIS ISSU E AGAINST THE ASSESSEE. 12 IN THE RESULT, THE REVENUES APPEAL AND THE ASSESS EES CROSS OBJECTION STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH NOV 2012. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 14 TH , NOV 2012 RAJ* ITA NO. 572/MUM/2010 CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAU TIQUES . 13 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI